The Hippo pathway plays a key role in organ size control by regulating cell proliferation and apoptosis in Drosophila. Although recent genetic studies have shown that the Hippo pathway is regulated by the NF2 and Fat tumor suppressors, the physiological regulations of this pathway are unknown. Here we show that in mammalian cells, the transcription coactivator YAP (Yes-associated protein), is inhibited by cell density via the Hippo pathway. Phosphorylation by the Lats tumor suppressor kinase leads to cytoplasmic translocation and inactivation of the YAP oncoprotein. Furthermore, attenuation of this phosphorylation of YAP or Yorkie (Yki), the Drosophila homolog of YAP, potentiates their growth-promoting function in vivo. Moreover, YAP overexpression regulates gene expression in a manner opposite to cell density, and is able to overcome cell contact inhibition. Inhibition of YAP function restores contact inhibition in a human cancer cell line bearing deletion of Salvador (Sav), a Hippo pathway component. Interestingly, we observed that YAP protein is elevated and nuclear localized in some human liver and prostate cancers. Our observations demonstrate that YAP plays a key role in the Hippo pathway to control cell proliferation in response to cell contact.